Automaker expected to announce that only a small fraction of the holders of its $27 billion in bonds agreed to swap that unsecured debt for a 10 percent equity share of a recapitalized GM.

NEW YORK -- In the end, General Motors' massive cash needs likely trumped any chance of the automaker avoiding a bankruptcy court-supervised reorganization.

General Motors Corp. is expected to announce early Wednesday that only a small fraction of the holders of its $27 billion in bonds agreed to swap that unsecured debt for a 10 percent equity share of a recapitalized GM.

Reaching such an agreement was one of the requirements of the Obama administration, which already has committed $19.4 billion in aid and said it would only provide more funds if bondholders and unionized workers made concessions that substantially reduced GM's costs.

There was a small hope Tuesday that GM could avoid a bankruptcy filing when the United Auto Workers union disclosed that it would take a 20 percent stake in GM -- down from the original plan of 39 percent. That seemingly would have allowed the Detroit-based company to sweeten the pot for its recalcitrant bondholders.

But GM's need for as much as $50 billion in additional financing from the government to pay off secured lenders and keep the company operating during a complicated restructuring means instead that the government's stake will probably rise from 50 percent to as much as 70 percent, according to The Wall Street Journal. In exchange for the roughly $8 billion in aid it is expected to pony up as well, the Canadian government also will likely receive a small stake in the automaker.

Such an arrangement would leave bondholders back where they started -- and a Chapter 11 filing all but certain. The deadline for GM's bondholders to tender their debt was midnight Tuesday. If bondholders representing 90 percent of GM's unsecured debt -- about $24 billion -- didn't agree to the exchange, GM has said it will file for bankruptcy protection.

Meanwhile, crosstown rival Chrysler LLC heads to court Wednesday to ask a bankruptcy judge for permission to sell the bulk of its assets to a group headed by Italy's Fiat Group SpA in hopes of saving itself from liquidation. Attorneys for Chrysler maintain that the Fiat deal is the company's only hope to avoid being sold off piece by piece, but car dealers, bondholders, former employees and others are protesting what they see as the government speeding Chrysler through the bankruptcy process without regard for certain creditors.

Chrysler filed for bankruptcy protection April 30, after the government ended talks with a group of hold-out bondholders.

Automakers worldwide are struggling as the global recession has reduced demand for new vehicles. But GM and Chrysler have been particularly hobbled by promises to cover the health and pension costs of tens of thousands of unionized retirees -- along with recent record-high gasoline prices that reduced demand for their low-mileage trucks and SUVs.

The UAW disclosed Tuesday it agreed to take a much smaller 17.5 percent stake in GM, plus a warrant for an added 2.5 percent stake to partially fund the $20 billion that GM must put into a trust that will start paying retiree health care costs next year.

In exchange for agreeing to a lower equity ownership stake, GM promised the union $6.5 billion of preferred shares that pay 9 percent interest, plus a $2.5 billion note. The union, facing the possibility that it may not be able to quickly sell GM shares to fund its trust, preferred the certainty of the $585 million annual dividend that accompanies the preferred shares.

The remaining $10 billion will come from health care trust funds that GM already has set up. The trust will get a seat on GM's board as well, although it will have to vote at the direction of GM's other independent directors. The concession deal, on which roughly 61,000 workers will vote by Thursday, also froze wages and cut retiree health care benefits, performance bonuses and cost-of-living raises.

When GM announced its debt exchange last month, the company offered bondholders 225 shares of common stock for every $1,000 in debt -- or a 10 percent stake in the restructured company. In addition to the UAW's share, the federal government would take 50 percent for exchanging a combined $20 billion of their debt to equity. Current stockholders would end up owning just 1 percent of the company.

"It wasn't particularly generous" to the bondholders, said Shelly Lombard, senior credit analyst at New York-based bond research firm GimmeCredit. "I think it's one of those things where GM now figures bankruptcy is inevitable."

A committee representing GM's biggest bondholders -- mostly big banks and other institutional investors -- has opposed the debt-for-equity swap from the start. A spokesman for the group declined to comment Tuesday on the progress of the exchange.

Smaller, "retail" bondholders -- individual investors like retirees and families -- have also railed against the terms of the exchange. A retiree group called The 60 Plus Association has organized bondholder rallies across the country to protest GM's offer. A spokeswoman for the organization said it is preparing to mount a legal challenge to terms of the bond exchange in bankruptcy court. Both groups say the offer gives them too small a stake for the amount they are owed.

GM has said it could extend the deadline for the bond exchange and will decide Wednesday. The company previously has said the government was preventing it from offering bondholders more than 10 percent of the restructured company.

The government has had dialogue with GM's bondholders but believes it has made them a fair offer relative to their standing in a potential bankruptcy, said a person familiar with the discussions. The person spoke on condition of anonymity because the discussions were private.

"Recently there have been far more constructive and orderly conversations with the bondholders," the person said. "We're going to have them right up to the very end."
GM spokeswoman Julie Gibson declined to comment on the progress of the debt exchange Tuesday evening, pending an announcement scheduled for Wednesday morning.

Some analysts said GM's bondholders may be holding out for better terms in bankruptcy.
Stephen Lubben, a law professor at Seton Hall University, said unsecured creditors like bondholders often recover 40 percent of their investment in bankruptcy.

"One way of looking at this is the bondholders feel they can't do any worse than bankruptcy," Lubben said. "They may not do much better, but they can't do any worse."
Another factor complicating the decision making of GM's bondholders: Many large investors hold insurance policies on their bonds known as credit default swaps. Such policies would reimburse bondholders in the event of a "credit event" like a bankruptcy filing.

Investors who hold credit default swaps on GM debt stand to make about $2.33 billion if the insurance contracts are triggered, according to the Depository Trust & Clearing Corp.

Lubben said holders of such swaps "would do better in bankruptcy because the bankruptcy is going to trigger their (insurance) contracts."

Some believe the offer was doomed from the start. It's unclear how many of the thousands of individual and institutional bondholders have participated in the exchange, but analysts speculate the number is low.

"It's nowhere near 90 percent," said Kip Penniman, analyst for KDP Investment Advisors. "If GM announced they got low single-digit participation, it would be a slap to GM and the absolute response to the Treasury-mandated offer. ... A cynical person would say that the offer was set up to ensure GM would go into Chapter 11 and provide the government a scapegoat."

If GM's bondholders do tip the company into bankruptcy, the chain of events would prove similar to what Chrysler faced one month ago. In that case, four banks holding 70 percent of Chrysler's $6.9 billion secured debt agreed to take $2 billion in cash, but a collection of hedge funds refused to budge, sending the automaker into bankruptcy protection.

However, the two cases are different in important ways. GM's bondholders are unsecured, meaning their debt isn't backed by hard assets like factories and property and are therefore likely to see a smaller recovery in bankruptcy. They are also more diverse and tougher to organize, ranging from big banks to hedge funds to mom-and-pop investors.

GM came closer Tuesday to settling the fate of Opel, its German operations. GM has been trying to sell Opel, and several suitors have emerged, including Italian automaker Fiat Group SpA and Canadian auto parts supplier Magna International Inc. German Chancellor Angela Merkel is scheduled to meet Wednesday with German and U.S. officials, and representatives of GM and Opel's potential suitors.